Enhancing Subnational Institutional Capacity and Service Delivery Through Performance Grants

Development Challenge

Cities across low- and middle-income countries face constraints that limit their ability to deliver services and support growth. Local governments often operate with weak public investment management systems, inadequate financial management practices, fragmented planning processes, and unpredictable intergovernmental fiscal transfers. These constraints reduce the volume and quality of public infrastructure investment, resulting in underinvestment in new assets and inadequate maintenance of existing ones. The resulting service gaps reduce urban productivity, weaken job creation and limit the ability of cities to attract private capital and investment.

World Bank Group Approach

UPGs are a financing mechanism for addressing institutional constraints in municipal performance, intergovernmental financing, and urban service delivery. The World Bank supports their use through a package of financing, complementary technical assistance, and knowledge.

• Financing. The World Bank provides financing for government-led programs that channel predictable, rules-based fiscal transfers to local governments through UPGs, with disbursements linked to independently verified improvements in municipal systems and service delivery, including how cities plan and maintain infrastructure, collect revenues, and provide essential services.
• Technical assistance. The World Bank provides targeted technical assistance to operationalize UPGs and strengthen core municipal capacities in planning, public financial management, procurement, and implementation.
• Knowledge. The World Bank applies lessons from UPG implementation to replicate and scale the use of UPGs, tailoring program design to different country contexts.
  

Results and Outcomes

UPG programs have delivered measurable improvements in municipal performance, fiscal management, and urban service delivery across multiple countries. Evidence from World Bank-supported operations shows that performance-linked incentives have strengthened municipal systems and increased own-source revenue mobilization, enabling local governments to expand infrastructure investments and services.

• Ethiopia Urban Institutional and Infrastructure Development Program (2018-2024) - Strengthened municipal financial sustainability by more than doubling local revenues from $68 million in FY2020 to $156 million in FY2023, while enhancing urban livability. The program transformed city infrastructure through over 1,600 km of cobblestone roads, and expanded public green spaces, improving, resilience and access to services. It also provided large scale employment opportunities creating nearly one million temporary jobs and over 237,000 permanent jobs with women accounting for 49 percent of total employment.
• Kenya Urban Support Program (2017-2023) - Performance-based grants improved infrastructure and services for about 3.6 million urban residents, financing roads, drainage networks, non-motorized transport facilities, markets, bus parks, and public lighting.
• Tanzania Urban Local Government Strengthening Program (2020-2023) - The program improved institutional performance scores, strengthened fiduciary systems, and delivered infrastructure for municipalities serving about 3 million residents. The model informed the follow on Tanzania Cities Transforming Infrastructure and Competitiveness (TACTIC) project, targeting additional municipalities serving 7 million beneficiaries.
• Uganda Support to Municipal Infrastructure Development Program (2013-2024) - Over 1.6 million people directly benefited from improved municipal infrastructure, including roads, markets, bus parks, resource centers, and public facilities. Participating municipalities achieved a cumulative 83 percent increase in own-source revenues.
• Ghana Secondary Cities Support Program (2019-2026) - The program supports 35 secondary cities and has reached approximately 9.6 million beneficiaries. The program achieved a cumulative 148 percent increase in own-source revenues across participating municipalities and was scaled up with $145 million in additional financing to extend coverage to newly created regional capitals.
  

Contribution to World Bank Group Targets and Jobs

UPG programs stimulate job creation through both immediate employment and long-term improvements in local economic competitiveness. By linking performance-based financing to institutional reforms in areas such as land-use planning, licensing, mobility, and public investment management, UPGs create conditions for sustained economic growth and private sector activity, while capital investments generate direct, labor-intensive employment. In addition to the Ethiopia Urban Institutional and Infrastructure Development Program mentioned above, UPG-supported investments under the Upper Egypt Local Development Program created more than 71,000 direct jobs across industrial zones, economic clusters, and market facilities, while sustained reforms enabled broader employment growth.

Lessons Learned

Appropriate grant size matters for quality and sustainability.

The size of performance-based grants is critical to ensuring incentives are strong enough to change behavior and generate meaningful results. Global experience suggests that UPG allocations should constitute at least 20 percent of the total discretionary development and capital grant budget available to local governments to have their intended incentive effects. In per capita terms, the allocations that meet this threshold differ significantly across contexts, ranging from US$10-20 in Tanzania under the Urban Local Government Strengthening Project, which enabled municipalities to finance medium-scale projects, to US$20-45 in Uganda under the Support to Municipal Infrastructure Development Program-for-Results, which enabled larger, integrated, multi-year investments.

Sequenced scale-up.

Starting with a limited number of local governments and progressively expanding coverage allows systems to be tested, refined, and strengthened before larger rollouts. In Ethiopia, the Second Urban Local Government Development Program expanded from 19 to 44 and then to 117 municipalities maintaining strong performance while introducing new priorities such as local economic development, climate resilience, and gender.

Next Steps

The World Bank's direction on subnational finance is to scale financing for urban infrastructure by strengthening subnational institutions, improving core municipal systems, and enabling the preparation and execution of larger, well-prioritized investment programs. Within this agenda, UPGs are a central instrument, as they directly address persistent constraints to municipal financing, such as weak fiscal frameworks, narrow own-source revenue bases, unpredictable intergovernmental transfers, and limited technical and absorptive capacity, through structured, performance-oriented incentives.

Two decades of implementation have demonstrated that UPGs can deliver these results, but until recently, their application has been limited primarily to medium-sized cities. A recently approved operation in South Africa marks a significant evolution, demonstrating how the instrument can be adapted to varied institutional contexts, including, for the first time, for metropolitan cities. This expanding range of application strengthens the case for the next phase: replicating and scaling the UPG model across a growing pipeline of countries, moving from foundational system strengthening toward deeper fiscal and financial impact, while continuing to prioritize job creation and strengthening local economic conditions.